Raúl Prebisch famously argued that developing countries should replace imports with domestic production because of the potential gains in industrialization that would stem from such import substitution. In the strategy advocated by the late Argentine economist, the state would play a central role by nationalizing companies, subsidizing domestic producers, and setting tariffs.

Prebisch-like development strategies gradually fell into disgrace during the debt crises near the end of the last century—in no small measure because multilateral rescue organizations such as the World Bank and the International Monetary Fund advocated economic liberalization.

Instead, the export-driven success of Asian economies like South Korea shifted the focus of the economic development paradigm from discouraging imports to stimulating exports. That change in emphasis from imports to exports was predicated on both the catalytic effect on domestic production of exposure to global competition and the transfer of technology that stems from foreign direct investment. Gradually, as the development paradigm shifted, so did policies—from those promoting trade to support domestic industries to those aimed at turning developing countries into platforms for multinational corporations in order to integrate into global markets.

But for countries in the Middle East and North Africa (MENA), export-led development strategies have had little success, and instruments of the earlier import-substitution strategy—such as state-owned enterprises, high tariffs, and subsidies—have survived. Instead of fostering domestic production as Prebisch envisioned, however, these legacies have created crony-capitalistic industries that have limited the level of competition in many sectors of the economy and furthered the dependence on imports. Episodes of liberalization ended up transferring ownership from state to private monopolies. What is more, competition authorities—still in their infancy in MENA—have had little space to level the playing field among private sector actors and stop collusion among companies including foreign and state-owned ones.

Besides tariffs, which are taxes on imports, restrictions can include quotas (limits on import quantities) and constraints on the purchase and sale of foreign currency. In MENA countries, these barriers have had the detrimental effects of fostering an import lobby that distorts market incentives; of reinforcing an inefficient subsidy-based private sector; and of causing higher prices for tradable goods.

First, agents that benefit from the import “industry” constitute the biggest lobby against domestic production. For example, exclusive import licenses grant a monopoly on imports to an individual or a national agency. These licenses discourage potential domestic production. Indeed, licenses–and the monopoly power associated with them—increase the domestic price of imports and import-competing goods, thereby increasing costs of producers who buy these imports (or substitutes) as inputs. Auctions to allocate import licenses with expiration dates are a good approach to taking on importer monopolies. Auctions could limit the capture of excess profits by non-deserving agents and result in, at the very least, lower prices and costs to downstream users and consumers.

Second, universal subsidies reinforce the distorted structure of the economy toward import dependence. Subsidies on imports such as food or basic goods increase demand for them. Moreover, the subsidy renders artificially higher the demand for the products of the exclusive importers and can cost the government a lot of money that could be spent elsewhere. Profits from oil exports or foreign aid have funded the universal subsidies that support the monopolization of imports. When government purchases are relatively large, the potential for quid pro quo corruption with private actors is large. The agriculture and agribusiness sectors epitomize distorted competition between local production and (monopolized) imports in the presence of consumer subsidies. That is especially the case for wheat and rice in many African countries. There are, of course, other impediments to the development of agriculture to serve domestic demand, but ending monopolized imports and substituting targeted subsidies for the universal variety would help farm sectors meet domestic needs.

Third, import dependence leads to persistent twin deficits; that is, a budget deficit drives the trade deficit. Imports of universally subsidized goods are widely inflated. The excessive imports are either smuggled into other countries or used as an input in industry, which as a result garners an artificial advantage when the import is not sold at world prices. That is especially the case when the government is in the business of buying the import and selling it. A good example is the soft-drink industry, which benefits from subsidized sugar—and carries bad health consequences to boot. Liberalizing imports and associated logistic and distribution chains, and cutting subsidies, would help resolve the persistent deficits that have plagued the region since the start of the Arab Spring in 2011 and the collapse in oil prices in 2014. Unless those deficits shrink, citizens may be asked to face drastic cuts in transfers or social services to preserve the rents of a few non-deserving oligarchs.

Putting the emphasis on liberalizing imports should be at the heart of any development strategy in MENA. That should foster the development of productive sectors and be a good base for promoting exports. Even if that does not occur, reducing monopolies on imports would still be valuable because it would result in lower prices and reduced deficits.

Richard K. Green is a Senior Visiting Fellow, Economics, at Brookings India. He is also Director of the Lusk Center for Real Estate, University of Southern California. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac. He was a visiting professor of real estate at the University of Pennsylvania’s Wharton School. He was recently President of the American Real Estate and Urban Economics Association. In 2015-16, he served as Senior Advisor for Housing Finance at the US Department of Housing and Urban Development.

Green, R. K., Thoughts on Rental Housing Market and Policy; Cityscape, A Journal of Policy, Development and Research; 2011.

Green, R. K. and A. Reschovsky, Using Tax Policy to Subsidize Homeownership; in A. Staiger (Ed.) Public Spending and Incentives for Community Development Federal Reserve Bank of Boston-Aspen Institute; 2011.

Figure 1: GDP growth rates before and after trade liberalization

GDP growth rates have been about 2 percentage points higher after trade liberalization. Investment-to-GDP rates have been almost 10 percentage points higher—and sustained for a long time after liberalization. Moreover, this higher growth has contributed to faster poverty reduction in globalizing countries. And there is no systematic relationship between trade liberalization and inequality. In some globalizing countries inequality rose, while in others it fell.

Why then does globalization elicit so much criticism from NGOs and academics, among others? One reason is that the average growth rates hide a huge variation among individual countries. Among major Latin American countries, for instance, the only country that saw a significant increase in its growth rate post-liberalization was Chile; Brazil and Mexico experienced a decline in their growth rates. Similarly, in Africa, with the exception of Ghana, trade liberalization was accompanied by a decline in average growth rates in many countries. It is only in Asia that most countries have seen an increase in growth rates after liberalization. This includes not just the celebrated cases of India and China, but smaller countries such as Bangladesh, Sri Lanka, and the Philippines.

Furthermore, in some of the countries where the growth impact was weak, the employment effects were even more troubling. In Brazil, the regions facing tariff cuts experienced significant drops in formal-sector employment and earnings. These effects became more pronounced 20 years after liberalization.

Finally, for trade liberalization to have its intended effect, a host of other factors have to be in place. Africa still has a huge infrastructure deficit, which means that even if there is trade reform, it remains difficult to ship manufactured goods to ports. India has seen very little growth in manufacturing employment—even though it has a large number of low-skilled workers. The level of education of these people is woefully poor: The share of second-graders in rural public schools who could not read a single word was 80 percent.

Do these criticisms imply that globalization has gone too far? On the contrary, they suggest that it has not gone far enough. For the benefits of trade liberalization were not simply the efficiency gains from removing a set of tariff distortions in the economy. Simulations with computable general equilibrium (CGE) models showed that, if this were the only effect, the benefits from trade reform would be minuscule. Trade restrictions did more than add a distortion to a competitive economy. In many cases, they created domestic monopolies that could exercise their monopoly power behind trade protection. Some of these monopolists were also politically connected, which may explain the resistance to trade liberalization in many countries. When the presence of these monopolies is incorporated into a CGE model, the beneficial effects of trade liberalization become much greater. The reason is that trade liberalization subjects these monopolists to foreign competition, breaking down their monopoly power, lowering domestic prices much more (thereby making it cheaper for those who buy these goods), and permitting the exploitation of economies of scale.

But trade liberalization only affected monopoly power in the tradable sector—manufacturing and agriculture. It did nothing to break down the monopolies in the nontradable sector—services such as finance, transport, and distribution. To this day, the services sector remains largely unreformed. Yet, finance, transport, distribution, and business services are necessary inputs into the production of exports, accounting for about 30-40 percent of value-added in exports. If these nontradable services remain monopolized, then it is difficult for the tradable sector to expand in the wake of trade liberalization.

That this is not just a theoretical possibility, I will illustrate with three specific examples.

Cronyism in Tunisia. Tunisia undertook major trade reforms in the 1990s but export growth remained anemic. This is surprising given Tunisia’s proximity to Europe, fairly good infrastructure, and an educated population. During this same period, the family of the then President, Ben Ali, had interests in certain enterprises. The sectors where these enterprises were situated received protection from both domestic and foreign competition. And these sectors were telecoms, transport, and banking. So the prices of these services were artificially high (Tunisia had the third-highest telecoms prices in the world). Since you need these services to export, Tunisian exports were not competitive in world markets. The monopoly power enjoyed by these firms can be seen in the distribution of profits: The “Ben Ali firms” relative to the rest of the economy accounted for 0.8 percent of employment, 3 percent of output—and 21 percent of profits.

Roads in Africa. As already mentioned, Africa’s infrastructure deficit stands in the way of harnessing the gains from trade liberalization. But a study of the major road transport corridors in Africa revealed that vehicle operating costs along these four corridors were no higher than in France. What was higher in Africa were transport prices—the highest in the world, in fact. The difference between transport prices and vehicle operating costs is the profit margin accruing to the trucking companies. These margins were of the order of 100 percent. How can this be? Because there are regulations in the books in almost every African country that prohibit entry into the trucking industry. These regulations were introduced a half-century ago when trucking was thought to be a natural monopoly. Today, there is no need for such regulation, but there are huge trucking monopolies in every country that lobby against deregulation. The fact that relatives of the ruling family own the trucking company doesn’t help. Africa’s high transport prices are due to monopoly power in the (nontradable) transport sector, which is in turn standing in the way of the continent’s benefiting from trade liberalization.

Teachers in India. How is it that second-graders in rural public schools in India can’t read? For about a quarter of the time, the teacher is absent. How can teachers continue to be absent year in and year out? In India, teachers run the campaigns of the local politicians. If the politician gets elected, he turns around and gives the teacher a job for which he doesn’t need to show up. The result is that teachers, being providers of nontradable services, have a small degree of monopoly power that enables them to be absent without major sanctions.

In sum, the reason trade liberalization has not fully delivered on the promise is that only tradable sectors have been subject to international competition. If this competition can be spread to the nontradable sectors, we will see greater competition in those sectors and bigger gains from trade liberalization. The problem with globalization is not that it has gone too far; it’s that it hasn’t gone far enough.

Mark Fabian is a Fulbright Postdoctoral Research Fellow and visiting researcher in the Global Economy and Development Program at Brookings.

His principle research interest is the theory and measurement of subjective well-being. He is interested in integrating subjective well-being scholarship in economics with philosophical and psychological notions of well-being, such as eudaimonia and basic psychological needs. His current research explores the impact of deindustrialization on the satisfaction of needs for autonomy, competence, and relatedness, and the consequences for voting behavior.

Fabian’s secondary research interest is hybrid policy designs: sophisticated combinations of government, market, and community policy tools that simultaneously promote equity and efficiency. Australia’s HECS system of income-contingent loans for higher-education financing is an archetypal example.

Fabian was previously manager of East Asia Forum, the world’s premier platform for short-form commentary on Asian policy issues. He also worked as a policy adviser to a Lok Sabha MP in New Delhi.

He holds a bachelor of arts in philosophy and politics and a doctorate in economics from the Australian National University.

]]>20190722 Scientific American David Victorhttps://www.brookings.edu/media-mentions/20190722-scientific-american-david-victor/
Mon, 22 Jul 2019 17:32:42 +0000https://www.brookings.edu/?post_type=media-mention&p=602140By Jennifer Perron]]>A conversation with the Young African Leaders Initiative’s Mandela Washington Fellowshttps://www.brookings.edu/events/a-conversation-with-the-young-african-leaders-initiatives-mandela-washington-fellows-3/
Tue, 09 Jul 2019 20:11:52 +0000https://www.brookings.edu/?post_type=event&p=605226On July 9, 2019, the Africa Growth Initiative (AGI) once again hosted a cohort of the Young Africa Leaders Initiative (YALI)’s Mandela Washington Fellows based at Rutgers University. The program, which aims to “empower young people through academic coursework, leadership training, and networking,” is the U.S. government’s signature effort to invest in the next generation of African leaders. The fellows hail from around the continent and come from a variety of backgrounds and professions, including lawyers, civil servants, doctors, and civil society leaders, among others.

The aims of the July 9 discussion with the Rutgers University-based cohort were not only to familiarize the fellows with the experience of working in and leading a think tank, but also to demonstrate the variety of research Brookings scholars undertake that might be pertinent to the fellows’ personal goals.

Brookings Executive Vice President Ted Gayer began the discussion by describing the various roles he plays within the institution, as well as challenges that arise in guiding an independent research institution. AGI David M. Rubenstein Fellow Landry Signé shared his personal story as a native of Cameroon and his career path as an academic, with professional interests in unlocking the potential of Africa and emerging economies, understanding why some countries succeed and others fail, and regional integration. He also expanded on the importance of transformational leadership, and the imperative of framing the narrative around Africa as one of opportunity and growth.

Center for Universal Education Fellow Christina Kwauk discussed her work on the continent identifying and eliminating obstacles to girls’ education, with an emphasis on how to change policy into practice. Global Economy and Development Communications Director Merrell Tuck-Primdahl spoke about her experiences working with media as well as strategies for making Brookings research impactful. Global’s Director of Administration Yvonne Thurman-Dogruer shared her experiences in leading organizations effectively. AGI Assistant Director Christina Golubski moderated the discussion.

The discussion with the fellows centered mainly around political economy and how to encourage decisionmakers to more effectively implement policies across the board. The fellows asked questions about how to effectively communicate their messages as well as maintain relationships with media. One fellow raised a question around how researchers can preserve their independence, respond to valid criticism, and uphold a high standard of ethics.

Automation is a key pillar of the Fourth Industrial Revolution and a significant threat to Africa’s need to create jobs. Historically, large-scale manufacturing has been an important step in the development process. Now though, labor-saving technologies threaten Africa’s comparative advantage in low wages, and recent evidence is already pointing to premature deindustrialization in developing countries. As wages in China rise, more firms are choosing to upgrade production technology rather than shift jobs to lower-wage countries, limiting opportunities for Africa to develop a large industrial base. Looking ahead, as robot costs fall, companies, including those in Africa, will also increasingly find it profitable to automate production.

Not all is lost: While automation is a challenge to the future of work in Africa, other aspects of the Fourth Industrial Revolution are creating tremendous opportunities for employment. As digital services expand, this sector has created jobs for agents and technology experts. Digitization in the financial sector has improved savings and expanded access to credit, improving financial inclusion and increasing women’s financial empowerment. Digital platforms like Uber and Lynk (the technology platform for informal sector workers in Kenya) are boosting entrepreneurship and self-employment.

Recommendations for harnessing digitization for job creation and growth

These innovations present tremendous opportunities for African countries to address development problems at scale and with greater efficiency. To fully harness the benefits, policymakers should understand the opportunities and challenges presented by new technologies. Governments must recognize digitization as a cross-cutting sector and develop an economy-wide strategy that is implemented by a well-funded and functioning Digitization Ministry. Policymakers should actively engage with the sector and adopt regulations appropriate to the rapidly changing environment. If regulation fails to keep up, it could slow or stall adjustment of the economy to the new technologies.

In addition, African countries must continue to make progress on digital infrastructure and connectivity. As cited in the “Creating Decent Jobs” report, internet penetration currently averages 35 percent, well below the global average of 55 percent. Policymakers should continue to support investments to develop robust digital infrastructure and expand access. Affordability is also a concern in Africa where internet access costs $119 on average each month, compared to the global average of $73 dollars. Addressing both connectivity and affordability will help broaden the benefits of digitization.

At the same time, given that digital sector jobs will require a different skill set—including soft skills such as cognitive ability, socio-behavioral ability, and critical thinking—education and training programs should be adapted and expanded to keep up with these new skill requirements. New digital technologies present opportunities to innovate and leapfrog in the education sector where the region’s booming population is expected to strain education infrastructure and resources.

Given the ongoing challenges of premature deindustrialization and the increasing adoption of labor-saving technologies in manufacturing, countries must develop other sectors of the economy for structural transformation. Research by the Africa Growth Initiative and the United Nations University World Institute for Development Economics Research has identified “industries without smokestacks,” sectors that share characteristics with manufacturing and could be development escalators for African countries. These industries include agribusiness, horticulture, tourism, and a growing number of service industries, including information and communication-based services.

Finally, governments must step up revenue mobilization efforts to finance the digitization agenda. Since 2000, African countries have made progress as non-resource tax revenues have increased steadily from 11 percent of GDP to an average 15 percent in 2015. According to a recent Africa Growth Initiative study, tax capacity in sub-Saharan Africa is estimated at about 20 percent of GDP. In the short term, bridging the gap between the region’s current revenues and its tax capacity by improving governance around taxation can mobilize an additional $110 billion annually, on average, over the next five years. Notably, digitization is also creating opportunities to increase domestic resource mobilization by streamlining revenues collection and sealing leakages.

The time for action is now. As I write in the chapter:

“The digitization agenda should be carried out with greater urgency … The scale of the disruption associated with new technologies will only grow with time. While Africa has demonstrated the ability to innovate and be a leader in leapfrog development, the scale of the challenge will require a more concerted and coordinated effort led by African governments and civil societies with strong support from development partners and institutions and private sector participation. A successfully digitized Africa will yield tremendous socioeconomic benefits for Africa and the global economy.”

Addisu Lashitew is a David M. Rubenstein Fellow in the Global Economy and Development program at the Brookings Institution. He has previously held postdoctoral researcher positions at Erasmus University Rotterdam (The Netherlands) and Simon Fraser University (Canada). Lashitew’s research interest spans various topics in development economics, including firm growth and productivity, resource allocation, and economic diversification. His most recent research has looked into market-based corporate approaches toward sustainable development and poverty alleviation. He has actively published on the topics of financial inclusion, social innovation, inclusive business strategies, sustainable finance, and Base of the Pyramid strategies. Lashitew maintains teaching and research affiliations with the African Economic Research Consortium (AERC) in Nairobi, and the School of Commerce of Addis Ababa University, Ethiopia.

Many development donors use country income levels—typically gross national income per capita—to ensure that their support for health systems in the developing world goes to countries with the greatest need. As a result, donors often reduce support when countries graduate from low- to middle-income status. While this graduation reflects advancement in economic development and is cause for celebration, transitions away from donor assistance for health typically bring significant challenges for middle-income countries.

The evidence also appears to indicate that countries that are expected to graduate from multilateral health assistance over the next decade are more vulnerable to backsliding and disease resurgence than countries that graduated in the past. For example, a recent comparison of upcoming graduates and previous graduates found that upcoming graduates “seem to have, on average, lower per capita income, greater indebtedness, weaker capacity to efficiently use public resources, more limited and less effective health systems, weaker governance and public institutions, and greater inequality.”

This is particularly worrisome in countries where the main funding for treating and preventing deadly diseases such as HIV/AIDS in key populations—for instance, men who have sex with men or people who inject drugs—comes from donors. Vulnerable populations in these countries face possible service coverage disruptions if social contracting mechanisms—whereby governments provide funds directly to civil society to implement specific activities—are not in place prior to a donor exit. In short, a sudden reduction or withdrawal or, even worse, a simultaneous withdrawal of external assistance by several donors has the potential to cause major disruption to the health system. This disruption can be particularly devastating for a transitioning country when external health support is concentrated among a small number of donors.

Without proper preparation, the progress of transitioning countries may slow or even reverse as a result of the loss of donor aid and technical support. This undoubtedly is detrimental to global public health and impedes progress toward reaching the Sustainable Development Goals.

Preparing for country ownership

Transition policy and planning are becoming an increasingly relevant concern for both donors interested in program sustainability and countries navigating away from external support and toward full country ownership. However, many donors have only recently begun to consider formalized exit strategies and plans. Even when this planning has happened, there is little publicly available information on the governance of transitions.

In an effort to improve public knowledge on transitions from health aid and to lay the groundwork for further research, we recently analyzed how major funders approach country transitions. This is part of a Duke University project on the transitions in disease burdens, domestic finances, and donor support in middle-income countries in Africa and Asia, at the Center for Policy Impact in Global Health. Based on our analysis, we will be publishing a series on how major global health funders are approaching health aid transition—the World Bank, the Global Fund to Fight AIDS, Tuberculosis and Malaria (the Global Fund), Gavi, the Vaccine Alliance, the U.S. government (with focus on the two agencies that provide the most funding for health, the U.S. President’s Emergency Plan for AIDS Relief and USAID), the U.K. government, and the Japanese government.

There were several general findings:

There is no common transition approach or philosophy among donors. All donors are assessing how they should structure their support to smooth the path to full country ownership. There are varying approaches to transition policy and planning and there is no consensus about a common set of criteria used to trigger these transitions and manage the adjustments. There is no real agreement even on the terminology used to describe this phenomenon.

Multilateral donors approach transitions in somewhat similar ways. In general, multilateral donors, such as Gavi and the Global Fund, have published transition policies with clear criteria for ineligibility. However, even in such cases, there are often significant exceptions to policies. For example, due to poor health indicators and a low likelihood of a successful transition, Nigeria received an extended transition period from Gavi, delaying its transition from 2021 to 2028. It is not clear whether these are exceptions to a rule or whether the decisions are based on discretion, not rules.

Bilateral donors approach transitions differently from multilateral donors and from each other. Many bilateral donors have identified ways to gradually and sustainably shift responsibility to domestic governments without fully exiting, such as shifting the modality of support (e.g., from grants to loans or from direct support to technical assistance), paving the way for eventual withdrawal. But others have not.

For donors with broad development portfolios, health-specific transitions can be unique from other sectors. Oftentimes, there is organizational guidance on funding allocations and eligibility, but health sector transitions can predate organization-wide transitions (e.g., USAID’s family planning graduations) or even receive special support after a country has graduated (e.g., the World Bank’s buy-down arrangement with the Global Fund for its loan to India for tuberculosis elimination). But again, there aren’t obvious rules that middle-income countries could use to plan these transitions.

Tracking the transitions

Good planning and sensible transition policies are needed as more low-income countries transition to middle-income status. To shed light on current planning and policy mechanisms, we will make available the findings of our donor transition analysis over the coming weeks, starting with the Global Fund. We also hope to provide pointers on how governments and donors can co-engineer sustainable transitions away from external assistance for health.

The World Bank just released a report on the economics of China’s Belt and Road Initiative (BRI). It provides estimates of the potential of Belt and Road transport corridors for enhancing trade, foreign investment, and living conditions for people in the countries that they connect. The report also tries to answer an important question: What happens to the internal geography of countries when they increase connections with others?

The question is important for national and subnational governments. Spatial equity in development outcomes ranks high as a barometer of political success. We know from research on New Economic Geography that regions with better access to foreign markets, such as large cities and border or port regions, stand to get the biggest gains from improved trade linkages. In fact, connectivity improvements could bring more spatial concentration, not the dispersion of economic activity as firms tend to cluster together to reap agglomeration economies (the winners). In the absence of mechanisms to compensate places that face “net economic losses” (the losers), such initiatives would exacerbate spatial inequalities and pose fiscal burdens for regions less and less able to bear them. Some parts of the country may only see trucks and rail wagons roll by whilst having to service the debt associated with infrastructure investments.

Places along the Central Asian Belt

The BRI has six main economic corridors: (1) the New Eurasian Land Bridge; (2) the China-Central Asia-West Asia Corridor; (3) the China-Pakistan Corridor; (4) the Bangladesh-China- Myanmar Corridor; (5) the China-Mongolia-Russia Corridor; (6) the China-Indochina Peninsula Corridor. In the new report, Somik Lall and Mathilde Lebrand focus on landlocked Central Asia—Kazakhstan, Kyrgyz Republic, Uzbekistan, and western China—but also consider how investments outside Central Asia will improve the region’s connections to the world.

In effect, they looked at what investments in transport corridors will mean for people in different parts of Central Asia. For Central Asian countries, the analysis is at the district level, called raion in most post-Soviet states. There are 174 districts in Kazakhstan, 162 districts in Uzbekistan, and 45 districts in Kyrgyzstan. For China, there are 2048 sub-provincial units.

The simplest way to describe each place is by measuring its structure of production, distance from a gateway, and its amenities. Places with good amenities, that produce tradeable goods and services, and are closer to global markets will get the biggest benefits from the BRI.

They look at what happens to welfare levels when there are three changes: infrastructure investments, border reforms, and greater labor mobility. The first two are a part of the Belt and Road Initiative, the third is not. But for China and the countries in Central Asia, the economic effects of the BRI depend as much on reduced transport costs and border reforms as they do on the domestic mobility of workers.

Who wins, who loses?

To keep things simple, Lall and Lebrand assume that before the BRI all goods are shipped through Eastern ports. The BRI opens up three new gateways: Khorgos for the New Eurasia Land Bridge, Kashgar for the China-Pakistan Corridor, and Kunming for the Bangladesh-China-India-Myanmar and the China-Indochina Peninsula corridors. The time it takes to transport products has three components: the time to reach a domestic hub using the road network, the time from this domestic hub to reach a main gateway using international corridors, and the time to cross borders between the domestic hub and the gateway using the best transport route. To reach major markets, Central Asian shippers have to reach Moscow, Istanbul, and Urumqi, the capital of Xinjiang province in Western China. The two ways to cut transport time and costs are better transport facilities and fewer border hassles.

BRI transport investments favor development in larger cities near border crossings, while people in more distant regions tend to lose out. Lower transport costs increase prices in the export sector and push wages and land rents up. In addition, because wages are equalized across sectors, prices in the non-tradable sectors also increase. While the amount of land is fixed in each district, workers are mobile across districts so internal migration equalizes wages across locations. Complementary investments in trade facilitation accentuate the gains in and around urban hubs near border crossings, so they increase spatial gaps in wages and welfare. Improved domestic transport networks help to spread the benefits, and offset the growing differentials.

Countries where people are not mobile will experience higher spatial wage inequality and, relatedly, lower welfare. In Kazakhstan, for example, real wages will grow five times more in and around Almaty than in northern parts close to the Russian border. The development benefits that Kazakhstan will get from closer economic relations with China will depend on how willing Kazakhs are to move to places like Almaty.

This is one aspect of a general principle: How much of the gains from economic integration a Central Asian country gets depends on complementary reforms such as the removal of Soviet-era obstacles to migration. Not making such reforms can convert gains into losses. The estimations indicate, for example, that spatial inequalities increase three-fold in Kazakhstan after the BRI if people face high mobility costs, compared to scenarios with lower costs of moving. Growing inequalities can jeopardize both political stability and economic growth in middle-income countries, and turn winners into losers.

Domestic policies and investments that increase mobility of labor, goods, and services can mediate potential spatial efficiency-equity tradeoffs. Within countries, workers can have very different levels of market access depending on where they live. The difference between the areas with highest and lowest accessibility to markets is 44 percent in Kyrgyzstan, 57 percent in Kazakhstan, 146 percent in China, and 200 percent in Uzbekistan. These differentials fall as labor mobility increases. When they do, spatial differences in the welfare of workers and their families also fall.

What happens in Kazakhstan?

In the absence of border reforms, BRI infrastructure investments disproportionately affect population and wages in the districts around Almaty. Kazakhstan’s comparative advantage in trade with China is in agriculture. Almaty and other large cities in Kazakhstan are specialized in non-tradable services and local manufacturing, so they should not get much of a boost. But cheaper manufacturing imports from neighboring China and better urban amenities mean that many people will keep moving to large urban hubs, and population pressures will increase housing costs and congestion.

Gains are more equitably distributed across Kazakhstan if border costs are also cut. A decline in border costs also supports large welfare gains in northern districts, the breadbasket of the country. The population of these regions also grows with new economic opportunities. Districts with a comparative advantage in agriculture that benefit from lower transport costs end up with more workers in services that support agriculture. So lowering both transport and border costs could lead to a more broadly distributed urbanization.

What happens in China?

Under the current conditions, reduced transport costs and new gateways along the land borders in the west and south of the country actually create incentives for workers to move towards the center and the east (Figure 2). The fastest growing districts are all located in the eastern provinces of China, already the densest, richest and most integrated region. With low labor mobility within the country, the BRI actually benefits the central and coastal parts of China more than it does the west. When this happens, wages ought to rise in the west and south because of reduced competition, crowding out economic activity. While the BRI is expected to increase development in the west, high mobility costs would lead to the opposite.

For China, one of the objectives of the BRI is to develop the west and the south. Border openings with Central Asia bring economic development to the west only if Chinese labor is mobile. This should be obvious to the overseers of the BRI. This will happen only if Chinese workers are willing to move closer to the western and southern gateways of Urumqi and Kunming. Lowering the obstacles to labor mobility leads to the spreading of economic activity across China (Figure 3)

Figure 2: With low labor mobility, the BRI increases concentration in the East and Center

Figure 3: With greater labor mobility, economic activity spreads towards the West and South

The forces of economic geography

The results confirm the potency of the forces of agglomeration, specialization, and migration. If the BRI is to spread China’s workers away from the east coast and central China and towards the south and west, the Chinese government will have to get rid of restrictions on labor mobility.

For the countries of Central Asia, labor mobility is even more critical for success as they sign up for more transport investments and deeper trade facilitation. Market-driven specialization will be the new order, a complete change from the forced spread of economic activities across the Soviet Union. For Kazakhstan, Uzbekistan, and the Kyrgyz Republic, labor mobility and migration could be the difference between prosperity and malaise.